If you are a developer, I am sure you are a worried man! Things are not at all rosy for the industry, which was a darling of foreign and domestic investors for the last few years. So what went wrong with the sector? why has it started loosing it shine? I believe there are many a factors hurting the developers and all at the same time. I will discuss few of them here.
1. Liquidity crunch
Real estate firms have depended hugely on foreign investors to raise capital to fund their expansion plans. Now the crumbling financial sector has forced investors to either pull out of the ventures or stop lending to firms (Rumor is Lehman Brothers has over $1 Billion of investments in Indian real estate sector!!). This has put a brake on the expansion plan of the developers. Additionally, RBI has strict lending conditions for Indian banks for real estate sector. With the stock market showing signs of southward movement across the global, developers plan to raise capital by IPO or issuing additional stocks has now no taker.
2. High interest rates
RBI's aggressive policy to control inflation over the last six months or so has led to higher interest rates in the market. Interest rates on home loans have shot up from 7.5% in 2005 to 14% in mid-2008. Residential properties buyers are shying away from borrowing loans because EMI has shot by tremendously. Thus, demand for residential properties has come down significantly. This is hurting developers who are left with lot of invesntory and stuck with ongoing projects. Moreover, borrowing rates for developers have shot up as well. Indian banks are putting a yield spread of over 400bp on real estate firms' bonds.
3. Global slowdown
There is a constant fear that US and EU might slip into recession due to the ongoing financial crisis. This will seriously hurt India's flagship Outsourcing industry. Given the fact that IT/ITES firms consume around 75% of all commercial properties in India, any slowdown in this industry will seriously hurt developers. Real estate firms have lauanched numerous projects (some eof them are under ccoinstruction).
All these will have a spiral effect on Indian economy. Global slowdown and higher interests mean lower growth for IT industry, exports sector, automobile industry, banking system etc. This may lead to lesser hiring in the coming months or years or layoffs to cut costs. All these will lead to negative sentiment in the market and among consumers; thus, lowering the demand for properties or in general on most of goods and services. I believe demand for properties in FY'09 would be 30-40% lower than that of in FY'08.
Monday, September 15, 2008
Thursday, September 4, 2008
Bangalore Real Estate Sector
Office sector
Demand in 2008 (1st half) was 7million sq ft compared to 6.6 million sq ft in the same period last year. I have divided Bangalore commercial areas in to three different zone:
1. Central Business District (CBD)
It includes areas near MG Road, Vittal Mallaya Road, Residency Road and Richmond Road. CBD remains the most attractive and suitable micro-markets for new companies entering Bangalore. The central locations offer ease of accessibility and visibility for these new companies and allow established companies to retain brand equity by being in the heart of the city. There is less supply of office space.
2. Non-CBD areas
It includes Indira nagar, Old Madras Road, Airport Road, CV Raman nagar, Inner ring road, Koramangala. The Non CBD area is being observed as the most preferred location for setting up office for high end engineering companies for setting up R&D centers/labs as well as high end support functions. High levels of absorption activity continued to be witnessed even in the Non CBD areas of the city where many corporates chose to relocate/expand due to availability of quality options offering adequate infrastructure and lower rental values compared to CBD. However, land bank is limited in these regions, which might put upward pressure on the real estate in near future.
3. Suburban and peripheral areas
This includes Whitefield, Outer ring road, Electronic city, Bannerghatta road and North Bangalore. The Suburban micro market is another zone that has witnessed high level of space intake by corporate over the year. Scarcity of space in the Non CBD area is furthering the case for location of corporate in the micro markets. The Peripheral areas remain preferred by the corporate for building their campus style facilities. Consequently these locations have witnessed frenzied construction activity from both developers and also individuals possessing large land banks.
Whitefield is now gaining favor as a viable micro market due to decongestion of the airport road, completion of the Marathahalli flyoverand availability of mid to low end housing infrastructure. The area between Marathalli and Sarjapur on the outer ring road has a fair amount of STP, SEZ and grade-A office supply. The excess supply along with low occupancy has put downward pressure on the prices.
With development of BIA and coming up of Peripheral Ring Road (PPR), properties prices in north Bangalore look to go up in the near future. PPR will connect Tumkur road, Magadi road, Mysore road, Bellary road, Old Madras road, Hosur road and Kanakapura road. This region has seen interests from leading IT firms, property developers for residential areas and hospitality sectors to set up star hotels.
Residential Properties
There has been a noticeable demand for prime residential properties and developers are targeting residential areas in the outskirts of Bangalore such as Whitefield, Sarjapur road, Banerghatta Road and Kanakpura Road. Demand is also high for leased apartments in prime areas of central Bangalore by company executives, due to limited supply there is upward pressure on rentals.
New developments are shifting away from the central Bangalore due to close proximity to IT and ITES areas and availability of land for lifestyle projects. Nearly six mega townships promoted by reputed developers are on the anvil in Bangalore. The proposed mega townships will have thousands of housing units and will be a mix of apartments, row houses and villas. Moreover the townships will include educational, commercial, retail and medical facilities.
Capital values for apartments in prime residential areas of Bangalore are in between INR 3000-4000 / Sq. Ft while rental values are in the range of INR 25-30/sq ft. p.m. Absorption rates for prime and quality residential apartments is very high thus demand is exceeding the supply in the areas of Outer ring road, Whitefield and Airport road. There is scarcity of luxury apartments thus in last one year capita; values in suburbs have increased around 35-50% due to high demand. Yield on Residential property in Bangalore is ranging between 6-7%.
Outlook
To check the trend in the residential properties find out from the local authorities on the trend in stamp duty and registration fees.
Improved connectivity between Bangalore and Mysore has led to gradual development of residential properties in and around Bidadi (southwest of Bangalore)
Upcoming DLF townships
NICE corridor
Upcoming BMIC (Bangalore-Mysore Infrastructure Corridor) project
Planned theme parks and resort in Bidadi
Demand in 2008 (1st half) was 7million sq ft compared to 6.6 million sq ft in the same period last year. I have divided Bangalore commercial areas in to three different zone:
1. Central Business District (CBD)
It includes areas near MG Road, Vittal Mallaya Road, Residency Road and Richmond Road. CBD remains the most attractive and suitable micro-markets for new companies entering Bangalore. The central locations offer ease of accessibility and visibility for these new companies and allow established companies to retain brand equity by being in the heart of the city. There is less supply of office space.
2. Non-CBD areas
It includes Indira nagar, Old Madras Road, Airport Road, CV Raman nagar, Inner ring road, Koramangala. The Non CBD area is being observed as the most preferred location for setting up office for high end engineering companies for setting up R&D centers/labs as well as high end support functions. High levels of absorption activity continued to be witnessed even in the Non CBD areas of the city where many corporates chose to relocate/expand due to availability of quality options offering adequate infrastructure and lower rental values compared to CBD. However, land bank is limited in these regions, which might put upward pressure on the real estate in near future.
3. Suburban and peripheral areas
This includes Whitefield, Outer ring road, Electronic city, Bannerghatta road and North Bangalore. The Suburban micro market is another zone that has witnessed high level of space intake by corporate over the year. Scarcity of space in the Non CBD area is furthering the case for location of corporate in the micro markets. The Peripheral areas remain preferred by the corporate for building their campus style facilities. Consequently these locations have witnessed frenzied construction activity from both developers and also individuals possessing large land banks.
Whitefield is now gaining favor as a viable micro market due to decongestion of the airport road, completion of the Marathahalli flyoverand availability of mid to low end housing infrastructure. The area between Marathalli and Sarjapur on the outer ring road has a fair amount of STP, SEZ and grade-A office supply. The excess supply along with low occupancy has put downward pressure on the prices.
With development of BIA and coming up of Peripheral Ring Road (PPR), properties prices in north Bangalore look to go up in the near future. PPR will connect Tumkur road, Magadi road, Mysore road, Bellary road, Old Madras road, Hosur road and Kanakapura road. This region has seen interests from leading IT firms, property developers for residential areas and hospitality sectors to set up star hotels.
Residential Properties
There has been a noticeable demand for prime residential properties and developers are targeting residential areas in the outskirts of Bangalore such as Whitefield, Sarjapur road, Banerghatta Road and Kanakpura Road. Demand is also high for leased apartments in prime areas of central Bangalore by company executives, due to limited supply there is upward pressure on rentals.
New developments are shifting away from the central Bangalore due to close proximity to IT and ITES areas and availability of land for lifestyle projects. Nearly six mega townships promoted by reputed developers are on the anvil in Bangalore. The proposed mega townships will have thousands of housing units and will be a mix of apartments, row houses and villas. Moreover the townships will include educational, commercial, retail and medical facilities.
Capital values for apartments in prime residential areas of Bangalore are in between INR 3000-4000 / Sq. Ft while rental values are in the range of INR 25-30/sq ft. p.m. Absorption rates for prime and quality residential apartments is very high thus demand is exceeding the supply in the areas of Outer ring road, Whitefield and Airport road. There is scarcity of luxury apartments thus in last one year capita; values in suburbs have increased around 35-50% due to high demand. Yield on Residential property in Bangalore is ranging between 6-7%.
Outlook
To check the trend in the residential properties find out from the local authorities on the trend in stamp duty and registration fees.
Improved connectivity between Bangalore and Mysore has led to gradual development of residential properties in and around Bidadi (southwest of Bangalore)
Upcoming DLF townships
NICE corridor
Upcoming BMIC (Bangalore-Mysore Infrastructure Corridor) project
Planned theme parks and resort in Bidadi
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